October 7, 2013 / 4:28 PM / 4 years ago

FOREX-Dollar pressured as U.S. budget deadlock drags on

* Boehner’s uncompromising comments raise U.S. debt default fears

* Dollar index stuck close to eight-month low

* Safe-haven yen rallies to near two-month high vs dollar

By Wanfeng Zhou

NEW YORK, Oct 7 (Reuters) - The dollar hovered near an eight-month low against a basket of currencies on Monday as a U.S. budget deadlock showed no sign of breaking.

Investors flocked to perceived safe havens like the yen and the Swiss franc, driving the dollar to it weakest since mid-August against the Japanese currency.

As the U.S. government moved into the second week of a shutdown and an Oct. 17 deadline to increase the nation’s borrowing limit approaches, neither Republicans nor Democrats offered any sign of impending agreement on either the shutdown or the debt ceiling, and both blamed the other side for the impasse.

“Last week investors were hopeful that the government shutdown would be short-lived in nature,” said Joe Manimbo, senior market analyst at Western Union Business Solutions.

“Now that it’s entering its second week, investors are growing a bit more edgy and that’s being played out in weaker world stocks and the dollar staying on the defensive.”

The dollar index fell 0.2 percent to 79.975, not far from an eight-month low of 79.627 hit on Thursday.

Fears have grown that a prolonged stalemate could hurt the fragile economic recovery and could compel the Federal Reserve to delay the trimming of its bond purchases, which is dollar-negative.

“The longer the delay goes on, the greater the potential for the dollar to weaken further, particularly against the yen. Dollar/yen has the greatest downside potential in the near term given that the market is still heavily short the yen,” said Lee Hardman, currency economist at BTMU.

The dollar fell to as low as 96.79 yen, its lowest since Aug. 12, before rebounding slightly to 96.97 yen, down 0.5 percent on the day.

Traders cited key support at 96.67 yen, its 200-day moving average. Reported large option expiries at 96.50 yen and 96.75 yen could keep the pair close to its current levels.

Osamu Takashima, chief FX strategist at Citigroup Global Market Japan, said there was a risk of the pair falling further.

“If the dollar falls to around 95 yen, under-hedged Japanese exporters may try to sell the dollar, further accelerating the dollar’s fall.”

The dollar fell 0.3 percent to 0.9046 Swiss franc, slipping towards a 19-month low of 0.89675 set on Thursday.

The euro rose 0.1 percent to $1.3572, not far from Thursday’s eight-month high of $1.3645.

Some analysts said losses in the dollar have been limited so far as investors still hope that politicians will find a last-minute resolution to avert a disastrous debt default.

The last big confrontation over the debt ceiling, in August 2011, ended with an eleventh-hour agreement under pressure from shaken markets and warnings of an economic catastrophe if a default were allowed to occur.

A similar last-minute resolution remained a distinct possibility this time as well.

The currency’s status as a safe haven has also been undermined by expectations that any damage done to the U.S. economy would be countered by the Fed sticking to its stimulus.

Jane Foley, senior currency strategist at Rabobank, said “there is some opinion in the market that the dollar’s status as a safe haven will eventually win the day”. She said during past debt ceiling negotiations the dollar had stayed directionless and managed a relief rally once compromises had been made.

“Near term, we expect the dollar index to retain a downside bias based mainly on the perception that the Fed could decide that delaying tapering (of quantitative easing) is necessary to protect the economy from any negative fallout from the impasse.”

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